States With Inheritance Tax

Inheritance tax is a form of federal-state tax that is imposed on the heirs of a deceased person’s property. It is primarily based on two things, the value of the estate and the relationship between the decedent and the beneficiary. 

It is vital to understand that the inheritance tax is not solely based on the accumulative value of the estate, as that would rather be an estate tax. Although both are considered to be “death taxes,” they are still fundamentally different. As of 2019, the District Of Columbia and twelve states have the estate tax, whereas just six states impose the inheritance tax. Among these states, Maryland is the only state that imposes inheritance as well as estate taxes.

states with inheritance tax

 states with inheritance tax  states with inheritance tax

states with inheritance taxThere Isn’t Any Inheritance Tax On The Federal Level

It is worth noting that at the federal level, there is no inheritance tax, and the Internal Revenue Service does not consider inheritance an income, either. However, there are some exceptions to this as well.

states with inheritance taxFor instance, retirement accounts that come under IRAs and 401(k)s are taxed as income. However, they are taxed after the beneficiary makes the withdrawals from the accounts. Additionally, if you make income or interest on the property or assets that you inherit, that interest or income is generally taxable by the federal government after you take possession.

 states with inheritance tax  states with inheritance tax

states with inheritance taxStates That Have An Inheritance Tax

 states with inheritance tax  states with inheritance tax  states with inheritanceSource: Pexels

 states with inheritance taxAs of 2020, the six states that levy an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Among these states, the person who is liable to pay the inheritance tax, the amount that is to be paid, and all those who have a federal exemption to this tax vary.

Until 2018, Maryland and New Jersey were the only two states that imposed both the estate tax and the inheritance tax. However, in 2018, New Jersey repealed its estate tax, making Maryland the only estate to still impose the two taxes.

Also, there is typically a threshold for the inheritance tax to apply. For instance, if that threshold is $50,000 and you inherit $100,000, the beneficiaries would only be liable to pay the inheritance tax on the additional $50,000. 

Iowa has a threshold of $25,000, and anything equal to or less than it does not get taxed. On the other hand, Maryland sets the threshold higher at $30,000.

 states with inheritance tax  states with inheritance tax

states with inheritance taxIs Your Inheritance Taxable?

states with inheritance tax states with inheritance taxIf the decedent lived in any of the six states that have inheritance taxes, such as Iowa, New Jersey, Maryland, or the District Of Columbia, the heirs would be liable to pay the inheritance tax. Moreover, if the assets exist in any of the aforementioned states, all of them would be taxable.

 states with inheritance tax  states with inheritance tax

 states with inheritance taxHow Do Inheritance Taxes Work?

states with inheritance taxstates with inheritance taxLet’s suppose that you live in Pennsylvania, and your relative who lives in New York loses their life. Keep in mind that although Pennsylvania imposes inheritance taxes on people living there, you would still not be subject to it as your relative lived in New York and the assets were there as well. As New York does not impose inheritance taxes, you would not be liable to pay any federal tax.

On the flip side, let’s suppose that your relative lived in Pennsylvania, and you lived in Washington. The relative in question passes away, and you become the rightful heir to their property. Here, although you live in Washington, a state that does not impose any inheritance taxes, you would still be liable to pay inheritance taxes. The reason is that the assets are present in Pennsylvania, which imposes inheritance taxes on the heirs of the property left by the deceased. So, it does not matter if you live in Washington DC. You would still have to pay the state tax. 

Lastly, if your relative lived in Washington and had property in the District Of Columbia, you would be liable to pay the inheritance tax on that property if you are the legal heir to it. As long as the property exists in a state that imposes an inheritance tax and/or the decedent lives in one of those states, the heirs would be liable to pay the state’s inheritance tax.

 states with inheritance tax  states with inheritance tax

Your Relation With The Deceased One

states with inheritance taxstates with inheritance taxInheritance taxes are not imposed on surviving spouses in any of the six states. The tax policy in Maryland exempts jointly-held principal residences acquired from domestic partners. As far as the tax policy in New Jersey is concerned, they exempt domestic partners from the inheritance tax. In all states except for Nebraska and Pennsylvania, the children and grandchildren are also exempted according to their tax policy. 

Moreover, the inheritance tax rate also depends on your relationship with the decedent. If you are not related at all, your inheritance tax rate would be the highest. 

 states with inheritance tax  states with inheritance tax

How The Inheritance Tax Rate Is Calculated And Paid

states with inheritance tax states with inheritance taxThe tax is paid by sending the check directly to the taxation authority. Normally, the executor of the estate calculates the inheritance tax for the beneficiaries and deducts it from the bequest. Also, some decedents leave instructions if the estate picks up the inheritance tax owed by the beneficiaries.